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October 2, 2014

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Brookings senior fellow gives Las Vegas a very gloomy 10-year forecast

A national expert said the run-up in home prices, overbuilding and subsequent foreclosures will stick with the housing industry for years. He suggested appreciation and construction will lag for the next 10 years.

Allan Mallach, a nonresident senior fellow with Brookings Institution in Washington, gave his gloomy forecast Oct. 26 in a lecture in Las Vegas hosted by Brookings Mountain West think tank.

“We’re going to have an extended period of modest economic growth and sluggish housing demand,” Mallach said.

Mallach said it will take time for the housing market to recover because over the past decade the industry built 7 million more homes than were occupied.

“Four years later we’re waiting for the bottom, and most people haven’t seen a crisis go on this long in this country,” Mallach said. “We’re not good at dealing with this kind of crisis.”

Many homes remain in the foreclosure pipeline, while millions more are in limbo, he said.

“This is going to haunt us for years,” Mallach said. “What will also haunt us is that two-thirds of the homes in Las Vegas are underwater.”

That means the homeowners owe more on their homes than they’re worth. Analysts fear that will trigger more foreclosures or simply have people walking away from their homes because they see no hope that values will rise.

“Most of us don’t really believe that the recession is over, and looking at the housing market and unemployment rate it doesn’t feel like this recession is over.”

The unemployment rate remains too high to be healthy and wages have gone down, Mallach said. Add in the debt that people have and it doesn’t add up to a good outlook, he said.

“Consumer confidence is at all-time lows and not any belief that this will get better and lot of this is because of housing,” Mallach said. “What we’ve been seeing in the last four years is not a short-term dip, but a fundamental reset.”

Mallach said he expects a greater willingness to rent than buy because of the sluggish economy and household formation should remain weak.

Home prices are likely to appreciate 1 to 2 percent above inflation for the next decade with a few exceptions in coastal areas, he said.

Four to five years ago, construction workers comprised 12 percent of the workforce in the Las Vegas Valley, but that has dropped in half, Mallach said. If the jobs don’t return, that will mean more people will move out of Las Vegas, he said.

“There is going to be a very low level of new housing construction whether it’s in the Las Vegas Valley or other housing markets,” Mallach said. “Construction employment isn’t going to grow significantly above today’s level, and that’s a huge drag for the valley.”

The political hostility that exists in the country today with both parties unable to work together will stifle the nation’s ability to deal with its housing and economic problems, he said.

“I don’t believe we’ll be able to rebuild our economy in a sustained fashion because our political system is incapable of responding constructively in this crisis,” Mallach said.

The federal government shouldn’t have policies that encourage people to choose homeownership, incur debt and push up housing prices.

Mallach proposed Congress eliminate the mortgage tax deduction, which he argues doesn’t encourage homeownership, but pushes up the prices of homes and drains the federal treasury of $100 billion a year.

“It would be painful if it’s phased out, and it shouldn’t be ended overnight,” Mallach said. “The mortgage tax deduction is like a millstone around the neck of sound housing policy.”

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